Which rate should the company use to discount capital

Assignment Help Finance Basics

Reference no: EM13619976

Dale Corporation has two independent projects in which it can invest. The initial cost of the project S is $26,000, and the initial cost of the project F is $63,000. The expected income streams from these projects are found in the table below. The risks of both projects are similar to the risks of current company projects. The current risk-free rate is 0.57% and the market risk premium (return to the market minus the risk-free rate) is expected to be 6.00% per year. The company's beta is 1.55. The company will be raising all cash for these projects through debt. The company expects to pay 1.03% for any debt used in the project(s). The target capital structure for the company is 40% equity and 60% debt. The marginal tax rate is 40%.

Expected Cash Flows by Project
Project S		Project F
Year 1	7,500		14,382
Year 2	6,614		5,526
Year 3	3,110		9,072
Year 4	5,498		17,918
Year 5	7,394		10,140
Year 6	1,528		8,320
Year 7	4,704		17,696
Year 8	5,220		14,988

a) What is the firm's weighted average cost of capital?

b) Which rate should the company use to discount capital projects (such as NPV) in this case?

c) What is the net present value (NPV) for each project?

d) What is the payback period for each project?

e) What is the internal rate of return (IRR) for each project?

f) Which project(s) should the company adopt to maximize the value of the firm? Briefly describe why you selected that (those) project(s)?

Reference no: EM13619976

Questions Cloud

Blackbriar corporation stock currently sells for 51 per : blackbriar corporation stock currently sells for 51 per share. the market requires a return of 8.2 percent on the firms

Ashes divide corporation has bonds on the market with 19 : ashes divide corporation has bonds on the market with 19 years to maturity a ytm of 11.0 percent and a current price of

If a stock is currently trading on the market for 27 its : if a stock is currently trading on the market for 27 its price one year ago was 20 and it just paid a dividend of 1.80

What will be the new required return for encore stock : in the world of trendsetting fashion instinct and marketing savvy are prerequisites to success. jordan ellis had both.

Which rate should the company use to discount capital : dale corporation has two independent projects in which it can invest. the initial cost of the project s is 26000 and

Henry visited the doctors office last week because of a : henry visited the doctors office last week because of a persistent cough and difficulty breathing. the bill has arrived

Select a foreign country and analyze its monetary system : select a foreign country and analyze its monetary system. research the countrys monetary system using at least five

A 25-year 1000 par value bond has an 85 annual coupon the : 1.whats the present value of a 4-year ordinary annuity of 2250 per year plus an additional 3000 at the end of year 4 if

Describe the circumstances that might create concern or : describe the circumstances that might create concern or wariness about a high margin business. provide a current or

User Account

All Pages